Here's something I read today on Schwab........
Skeptics Say 'Year 2000' Problem Could Be Downfall For SAP
Dow Jones Online News, Monday, February 09, 1998 at 13:02
By Matthew Rose, Staff Reporter of The Wall Street Journal
LONDON -- The SAP success story rolls on. But how long can it last?
On Friday, stock in German software giant SAP AG shrugged off the
previous day's 5% fall caused by the announcement that Dietmar Hopp was
retiring as co-chief executive officer to become chairman. Satisfied
that this was business as usual, SAP's stock rose 4% in electronic
trading. At the close, it was up 28.5 marks ($15.75) to 703.5 marks
($388.97) a share.
The bulls have reason for confidence. With sales growing 60% last
year to more than DM$6 billion, the Walldorf, Germany, company has risen
to become one of the largest software companies in the world. It has a
30% share of its market and a stock price that bursts through analysts'
targets almost daily. The stock has climbed 26% since the beginning of
the year.
However, obscured beneath the flurry of trades late last week,
skeptics are appearing. One theory in particular is slowy gaining
momentum in the investor community: the booming market for the company's
business software could take a dive in the second half of this year.
That could put pressure on a stock that is trading at an astonishing 60
to 70 times earnings expectations.
"This is a more serious issue than most investors recognize," says
Charles Phillips, a technology analyst with Morgan Stanley, Dean Witter
in New York.
The worry is the Year 2000 problem, oddly enough one of the prime
drivers behind the company's stunning growth.
In a report last year, U.S.-based research company Gartner Group said
that Year 2000-related business counted directly or indirectly for about
two-thirds of sales in the $14 billion market for "enterprise software."
Those sales are going to dry up after summer 1998, Gartner argued,
because companies like SAP can't install their fixes in under 18 months.
In addition, potential clients will be too busy slapping Band-Aids on
their clapped-out systems in preparation for Dec. 31, 1999, to even
contemplate buying SAP's pricey and complicated "enterprise software,"
it said.
"When you look at forecasts from SAP and others, they are going south
not north," says Andrew Dailey, Gartner Group's London-based research
director. He predicts a rapid fall in market growth to 17% in 1998, from
37% in 1997 as a result.
Until recently, analysts played down the Gartner report, which was
published in early 1997, because there was little evidence of a
slowdown. In the last two weeks, however, the traditionally conservative
SAP conceded in its 1998 forecasts there could be some fall in demand.
SAP's flagship software, R/3, has certainly become an essential kit
for big businesses globally. Companies such as Microsoft Corp.,
International Business Machines Corp., and Colgate-Palmolive Co., have
paid upward of $150 million to install a system that automates boring
back-office operations such as accounts, manufacturing orders and human
resources (and fixes the Year 2000 problem along the way).
But markets tend to punish fast-growing stocks that don't meet
expectations. Although SAP forecasts a 25% to 30% sales growth in 1998,
analysts expect 40%. The last time the company missed its target, in the
third quarter of 1996, its stock fell 24% in a day.
Jochen Klusmann, who covers SAP for Bank Julius Baer in Frankfurt
says the strength of the dollar against the mark is also a worry. The
currency effect, which contributed 11% to sales in 1997, is unlikely to
be repeated this year.
Moreover, Mr. Klusmann thinks 10% to 15% of the SAP's business is
Year 2000-related and is therefore a rare neutral on the stock. He says
a 1000 mark price is achievable this year, but if the Gartner scenario
pans out, current levels are unsustainable. "There is a large risk in
the share price," he says. Most analysts have targets of between 740
marks and 850 marks.
Mr. Phillips, the Morgan Stanley analyst sees the market dropping
back about five to seven percentage points causing a "temporary pause"
in SAP's rising stock.
Even if SAP rides out predicted difficulties, some analysts note that
other companies in the same business could suffer. Collen Kaiser, a
software analyst at BancAmerica Robertson Stephens lists Dutch
high-flyer Baan NV and Sweden's IndustriMatematik International Corp. as
vulnerable to a slowdown. "The valuations of all the enterprise software
vendors could dome down," she says.
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